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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Harry Ehrlich who wrote (24371)	11/22/1997 2:59:00 PM
From: Harry Ehrlich	Read Replies (2) \| Respond to of 61433

Jach, I am still studying the prospects of "averaging down" via options as opposed to buying the stock outright. The premise was that you could buy 1 in the money call and sell 2 out of the money calls, for every 100 shares owned, and break even on the transaction price. You are correct in that the price structure often does not allow one to break even on the transaction. To continue the study, we assume that you bought 1000 ASND at 35 and it is now at 25. If you buy 1000 ASND now at 25, your new breakeven is 30, as you have "averaged down. Your "cost" is $25,000 plus commission. Perhaps "cost" is not the proper term, but your "cash outlay" is $25,000. ASND Dec 25 calls are ask 2-1/4 and the Dec 30 calls are bid 9/16. Instead of buying 1000 shares, you buy 10 Dec 25 calls and sell 20 Dec 30 calls. In this case, you would wind up with a transaction cost of about $1125 plus about $110 in discount commissions. (Did I do that right?) The cash outlay of about $1235 is more palatable than the $25,000 outlay with less downside risk. The effective breakeven is now at 30. The example in Bloomberg used a call with a 2 month expiration. The same example as above, using January calls, results in a transaction price, or outlay, of $625 plus commissions. While not a free transaction, as the Bloomberg article indicated, it is still very interesting. Harry